Wait and See Attitude at Hungary’s Central Bank

September 20, 2011

As analysts anticipated, policymakers at the Magyar Nemzeti Bank left their two-week deposit rate at 6.0%.  Conflicting forces stalemated their thinking.  The growth outlook has worsened substantially, prompting officials to halve their 2012 GDP growth forecast to 1.5% and to become more confident about lower inflation in the future.  On the other hand, the Hungarian forint has dropped over 5% in less than two weeks, hurt generally by the never-ending euro debt crisis and a decision to let Hungarian households with Swiss franc-denominated mortgages to repay such at below-market rates.  This risk factor was addressed at length in the central bank’s statement.

Risk premia have risen in the past month and the forint exchange rate has weakened. The increase in perceptions of the risks associated with the Hungarian economy was mainly accounted for by the deteriorating outlook for global growth and the protracted debt crisis of the euro area. The option for households to repay their foreign currency debt at below-market rate represents a significant source of uncertainty in terms of Hungary’s risk perceptions. There is a risk that the program will cause a major setback in the domestic banking sector’s ability to lend, and companies’ reduced access to bank credit may lead to a further deterioration in the outlook for Hungarian growth. In the Council’s judgement, increased volatility in financial markets observed recently may persist for some time.

Fourteen rate reductions totaling 625 basis points were administered from November 2008 to April 2010.  In response to higher inflation, three normalizing 25-bp rate increases were implemented in November 2010, December 2010 and on January 24 of this year, but today’s decision to continue in a wait-and-see posture constituted the eighth such result in a row.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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